Essay on the Law of Agency

An Agent is defined as a relationship between two parties called PRINCIPAL and AGENT, whereby, the function of the agent is to create a contract/s between the principal and third parties or to act as the representative of the principal in other ways

Agency is the relationship that subsists between the principal and the agent, who has been authorized to act for him or represent him in dealing with others. Thus, in an agency, there is in effect two contracts i.e.

1. Made between the principal and the agent from which the agent derives his authority to act for and on behalf of the principal; and
2. Made between the principal and the third party through the work of the agent.

Creation of Agency

By express appointment by the principal

Generally an authority is conferred by the Principal to the Agent. If the agent exceeds this authority, then the principal will not be bound and the agent will be personally liable to the third party for breach of warranty of authority.

However the common law may extend the scope of the agent’s authority beyond this, to protect an innocent third party.

The principal will then be bound to the third party, but the principal can sue the agent for overstepping his actual authority, if it’s a breach of the agency contract.

By implied appointment by the principal

The law can infer the creation of an agency by implication when a person by his words or conduct acts as if he has such authority and the principal acknowledges that he was entitled to act accordingly. Implied authority, is not specifically mentioned by contract but assumed or implied by the nature of the relationship, are presumed to be given to an agent if that authority is necessary to perform the duties or responsibilities otherwise assigned to the agent or representative.

For example where one person allows another person to order goods on his behalf and habitually pays for them, an agency may be implied. In such a case, he will be bound by the contracts as if he has expressly authorized them.

– Chan Yin Tee v William Jacks and Co.

Apparent / Ostensible authority

While actual authority arises from an agreement, apparent authority is that which the law regards the agent as having, although principal may not have consented to the agent having such authority. Apparent authority can happen in two situations:

a) Where principal by words/ conduct, makes a third party to believe that ‘agent’ has authority to make contract for the principal

Where the agent previously had authority to act, but that authority was terminated by the principal and the principal did not inform third parties that he has terminated it

By necessity

The origins of the doctrine of necessitous intervention by someone who is in a legal relationship with the defendant lie in the principle of agency of necessity, where an agent went beyond his or her authority by intervening on behalf of the principal in an emergency. Because of the circumstances of necessity, particularly the impracticability of the agent communicating with the principal, the courts were prepared to treat the agent as though he or she had the necessary authority to do what was reasonably necessary to save the principal’s property. If an agency of necessity was established, the agent would be reimbursed for the expense incurred in rescuing the principal’s property.

An agency of necessity may be created if the following three conditions are met:

1. It is impossible for the agent to get the principal’s instruction.
2. The agent’s action is necessary, in the circumstances, in order to prevent loss to the principal to prevent them from rotting.
3. The agent must have acted in good faith.

In an urgent situation, an agent has authority to act in the best interest for the purpose of protecting his principal from losses.

– Great Northern Railway Co v Swaffield

Facts: Swaffield arranged for a horse to be transported to himself care of a railway station owned by the plaintiffs. The horse arrived at the station however Swaffield was not there to meet it. As the plaintiffs could not contact Swaffield before nightfall and had no facilities to accommodate the horse, they sent it to a livery stable.

Issue: Could the plaintiffs recover from Swaffield the amount they paid the stable for the horse’s accommodation?

Held: The plaintiffs had acted reasonably in placing the horse in the stable and were entitled to recover the expenses (which were reasonable) from Swaffield.

By Estoppel

A person cannot be bound by a contract made on his behalf without his authority. However, if he by his words and conduct allows a third party to believe that that particular person is his agent even when he is not, and the third party relies on it to the detriment of the third party, he (principal) will be estopped or precluded from denying the existence of that person’s authority to act on his behalf.

Ratification by the Principal

Agency by ratification can arise in any one of the following situations:

An agent who was duly appointed has exceeded his authority; or

A person who has no authority to act acted as if he has the authority.

When one of the above said situations arise, the principal can either reject the contract or accept the contract so made.

When the principal accepts and confirms such a contract, the acceptance is called ratification. Ratification may be expressed or implied.

The effect of ratification is to render the contract as binding on the principal as if the agent had been properly authorized before hand.

Duties of an Agent to his Principal

Duty of an agent is list down from s 164 to s 178 of the Contract Act 1950.

• To obey principal’s instruction
• To exercise care and diligence in carrying out his work and use such skill as he possesses
• To render proper accounts when required
• To pay to his principal all sum received on hi behalf
• To communicate with the principal
• Not to let his own interest conflict wit his duty
• Not to make an secret profit out of the performance of his duty
• Not to disclose confidential information or documents
• Not to delegate his authority

Duties of Principal to His Agent

The duties of a principal to his agent are provided in sections 175 to 178. The main duties are

• To pay the agent the commission or other agreed remuneration unless the agency relationship is gratuitous.
• Not to willfully prevent or hinder the agent from earning his commission.
• To indemnify and reimburse the agent for acts done in the exercise of his duties.

Termination of Agency

Sections 154 to 163 of the Contracts Acts states the various ways an agent’s authority may be terminated.

By act of the party

a) By mutual consent (both party agree)

b) By revocation by Principal

c) By renunciation by Agent

All the above can be done by giving notice (reasonable notice in the case of revocation and renunciation)

d) By the performance of the contract of agency. This happens when agency is created for single specific transaction. (sc 154 CA)

e) By the expiration of the period fixed/implied in the contract

d) By operation of law

e) By the death of either principal or agent. Because relationship between principal and agent is confidential and personal. (Sec 161 Illust. CA). Section 162 CA states when the principal dies, the agent must take all reasonable steps to protect and preserve the interests entrusted to him.

f) By the subsequent insanity of either principal or agent. A person of unsound mind cannot enter into contract to appoint an agent or to act as an agent.

g) By the bankruptcy/insolvency of principal.

h) By the happening of an event which renders the agency unlawful. This is an application of the doctrine of frustration to contracts. For agency contracts, there are examples of termination when the principal becomes an enemy alien because of war or where the subject matter is lost/destroyed.

Stevenson v Aktiengesellschaft Fur Cartonnagen Industrie

When an agency is terminated, the agent cannot bind the principal in transactions that he may have entered into with third parties. He will be personally liable to third parties for the contract.

-ends-